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Global stocks slide as yen, euro gains question policy potency

The U.S. dollar slid to its lowest against major currencies in well over a year on Tuesday, a move led by the yen’s continued march higher as investors grew doubtful about central banks’ ability to boost growth through aggressive policy easing.

That did not stop Australia’s central bank surprising markets by cutting interest rates to a record low of 1.75 percent, however, hitting the currency but lifting the country’s shares.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell to a three-week low and the euro’s burst through $1.16 for the first time in eight months pushed European shares deeply into the red.

Europe’s FTSE 300 index of leading 300 shares fell 1.3 percent .FTEU3 and Germany’s DAX shed 1.7 percent .GDAXI, both the lowest in nearly three weeks. Shares in German lender Commerzbank (CBKG.DE) were among the biggest decliners across Europe, down 7 percent after profits slumped in the first quarter.

Banks were among the biggest sectoral losers in Europe, down nearly 2 percent in early trading. Shares in Swiss bank UBS (UBSG.S) were down 6 percent after first quarter results.

“Since the all-time highs seen in the DAX in April last year the direction of travel has been that of a slow decline, and while we just about remain in positive territory for 2016, sentiment towards European markets continues to be markedly cautious,” said Michael Hewson, chief analyst at CMC Markets.

Analysts at Rabobank noted the dollar’s fall towards 105 yen from as high as 122 only a few months ago, a remarkable move that will do nothing to relieve the deflationary pressures in Japan and which reflects “the broader problem of unconventional monetary policy reaching its limits just like conventional policy already has”.

The yen rallied to 105.60 per dollar JPY=, its highest since October 2014, while the euro rose as high as $1.1614 EUR=, a level not seen since August last year.

This pushed the dollar index .DXY, a measure of the dollar’s value against a basket of major currencies, down to 92.00. It was last there in January 2015.

The Japanese currency has appreciated 13 percent against the dollar this year, accelerating its ascent after the Bank of Japan stunned markets last week by keeping monetary policy unchanged in the face of growing headwinds for its economy.

DOLLAR DOWN, COMMODITIES UP

Japan is in the middle of its Golden Week series of holidays. Markets were closed on Friday and will be closed from Tuesday to Thursday this week.

Australia’s central bank on Tuesday joined a growing line of central banks in adding more stimulus, cutting its cash rate to a record low of 1.75 percent to head off deflationary risks. The majority of economists surveyed by Reuters had expected no change at the meeting.

Australia’s stock markets cheered the surprise rate cut with the benchmark index easily the outperformer in Asia and extending gains to close up more than 2 percent on the day.

The Australian dollar AUD=D3 dropped sharply after the surprise rate cut with the currency falling below the 0.76 handle against the greenback from 0.77 earlier.

Emerging market stocks were 0.7 percent lower .MSCIEF, while U.S. futures pointed to a fall of around 0.5 percent at the open on Wall Street ESc1.

After raising interest rates in December for the first time in nearly a decade, the Federal Reserve held monetary policy steady last week. While it kept the door open to a hike in June, it gave no signal that it was in a hurry to tighten further given the economy’s slowdown, even as the labor market has improved.

“The Fed still thinks growth will be just over 2 percent this year but, on the evidence of Q1, it seems more likely that the euro zone will scale 2 percent, not the U.S.,” said Steve Barrow, head of G10 strategy at Standard bank.

“The upshot is that market expectations for U.S. growth might be too high – as investors take their cue from the Fed’s forecasts – while those for the euro zone are too low.”

Bond yields fell across the board, with U.S. Treasury yields down 3 basis points across the curve from two-year maturities out to 30-year maturities. The benchmark 10-year yield was at last at 1.83 percent US10YT=RR.

Crude oil prices drew support from the weaker dollar, inching back up towards Friday’s 2016 highs. U.S. crude futures CLc1 rose to $45 a barrel, slightly below the 2016 high of $46.78 hit on Friday but 80 percent above February’s low.

Spot gold XAU= also got a boost from the weak dollar, rising above $1,300 an ounce.